FCA fines firm for skill, care and diligence failings

Oct 11th '19

Today (11 October), the Financial Conduct Authority (FCA) announced that it has fined broker Tullett Prebon (Europe) Limited £15.4 million.


The fine is a result of the firm ‘failing to conduct its business with due skill, care and diligence, failing to have adequate risk management systems and for failing to be open and cooperative with the FCA.’


What was behind the Tullett Prebon fine?

An FCA investigation found that between 2008 and 2010, Tullett Prebon’s Rates Division (which comprised a significant part of Tullett Prebon’s overall business) had:


‘ineffective controls around broker conduct. Lavish entertainment and a lack of effective controls allowed improper trading to take place, including ‘wash’ trades (a ‘wash’ trade involves no change in beneficial ownership and has no legitimate underlying commercial purpose) which generated unwarranted and unusually high amounts of brokerage for the firm.’


Although this activity did not mislead the market or amount to market abuse, as Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA pointed out, ‘the wash trades were entirely improper, undermining the proper function of the market’.


Systems and controls at the firm did not work as they should, meaning that broker conduct was not questioned even when warning signs were present.


Detailing the reasons behind the fine, the FCA noted that:


  • Senior management wrongly believed sufficient systems and controls were in place, when in fact, systems and controls were not used or directed effectively.
  • Obvious red flags of broker misconduct and opportunities to probe were missed.


These shortcomings were exacerbated by Tullett Prebon’s failure to engage with the regulator as it investigated the issue in a ‘long and complex’ case. Steward commented that: ‘The firm’s failure to be open with the FCA about the existence of key evidence reflected a high degree of culpable incompetence and prejudiced the FCA enquiries.


Between August 2011 and October 2014, Tullett Prebon failed to respond to the FCA’s request for broker audio tapes and when it did finally send the tapes, initially provided an incorrect account as to how the audio had been discovered.


This failure to be open and honest with the Authority breached Principle 1 of the FCA’s Principles for Businesses.


The seriousness of this breach was another reason for the severity of the sanctions; the announcement stated that ‘Principle 11 is a fundamental plank of the operation of the regulatory system. Part of that depends on firms complying with information requirements and accurate information being given to the FCA.’


The FCA’s approach to fines – how does this fit?

Tullett Prebon qualified for a 30% discount in its fine under the FCA’s settlement discount scheme, by agreeing to resolve the issue. Without this discount, the fine would have been £22 million.


We reported in July this year that the regulator’s fines had totalled £320m in the last six months of reported figures. A Guardian article in the same month detailed some of the largest fines handed out by the regulator so far in 2019.


The biggest fine at that stage in the year was £102m, imposed on Standard Chartered in April for anti-money laundering failings that breached sanctions against Iran. Other big penalties included £45.5m for Bank of Scotland and £29m for Carphone Warehouse.


An increasing culture of accountability

The Tullett Prebon fine comes at a time of increased focus on senior management accountability.


In December this year, the Senior Managers & Certification Regime will be extended to cover all solo-regulated firms. The regulator published its final rules on this in the summer.


You can read more on how to prepare for the SMCR, and ensure your firm has a culture of accountability, in our blog, SMCR is coming to solo-regulated firms; what do you need to know?


Understand regulatory requirements to stay on the right side of the FCA

Ensuring you live up to the regulator’s expectations demands that you understand its rules – whether those apply to fair treatment of customers via your financial promotions, the suitability of your advice or having the right culture to support your business.


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